December 21, 2009

Defaulted Student Loan Portfolio Crosses $50 Billion

The October 2009 results are in and the size of the total defaulted student loan portfolio now sits at $50.8 billion (which is greater than the GDP of Serbia), an 11.4% increase from the size of the portfolio a year earlier. Guarantors have seen their defaulted student loan portfolios grow by 18.5% over the past year to $25.0 billion. Since collections on these defaulted loans represent about 50% of guarantor income this would appear to mitigate the sharp losses the guarantors have seen in loan processing and issuance fees (which are about 10% of their revenue stream) since 75% of FFEL loans in 2008-09 were purchased through ECASLA financing programs (and therefore didn't require a guarantee).

The Baltimore Sun provided advice to borrowers about the importance of avoiding default given the leniency of Uncle Sam in the period before you default:

"Can't find a job? Or, the one you have barely pays the bills? Maybe you
have decided to go back to school to wait out the recession. Whatever
the situation, the government has options to provide relief - sometimes
for years - from federal loan payments while you get your finances in
order. You might even have your loans forgiven over time.

"If students are conscientious about it and they explore their options,
there shouldn't be any reason they would be in default, even if they
don't have a job," says Mark Lindenmeyer, director of financial aid at
Loyola University Maryland.

As for the options available to borrowers, the article lists the following (the first two allow you to postpone payments, although interest will likely continue to accrue. The last two provide borrower with repayment options to lessen their monthly burden):

Deferral

Forbearance

Repayment plans: focus particularly on the income-based repayment program which was first implemented in July

Consolidation: May allow you to stretch payments out over longer period of time thereby reducing your monthly payment

Of course, the best piece of advice for those borrowing for their college education might just be to complete their program of study:

"Also, once in school, "the most important thing is to finish your
degree and finish it in a timely matter. Most of the defaulted
borrowers we see are those who did not complete their program," Murray
says. They leave school with debt, but without the degree to land a
good-paying job to repay their loans, he says."